For most investors, 2022 was a challenging year. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all entered bear markets and fell for the year by 9%, 19%, and 33%, respectively.
But for one hedge fund, which has made a living by hedging its common-stock holdings with options trades, it was business as usual. I'm talking about Citadel Advisors, which is headed by billionaire money manager Ken Griffin.
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Although Citadel wasn't the top-performing hedge fund on a percentage return basis in 2022, it stood head and shoulders above all other hedge funds with its $16 billion profit last year. Not only was this the largest single-year windfall ever for a hedge fund, but the cumulative $66 billion Citadel Advisors has made since its inception knocked Ray Dalio's Bridgewater Associates out of the No. 1 spot for the first time since the mid-2010s, according to estimates from LCH Investments.
For new and tenured investors, it can be insightful to know what stocks are piquing the interest of the top-performing hedge fund. Thanks to required quarterly Form 13F filings with the Securities and Exchange Commission, this is made easy.
Based on the latest round of 13Fs, which display buying and selling activity from the fourth quarter, here are four stocks Ken Griffin and his top-performing hedge fund are buying hand over fist.
Tesla
One of Ken Griffin's biggest fourth-quarter buys was electric-vehicle (EV) manufacturer Tesla (TSLA -1.11%). Griffin and his team increased Citadel's position by more than 4.8 million shares, or 178% from where things stood on Sept. 30, 2022.
Tesla's lure likely had to do with the greater than 50% drawdown its shares endured during the fourth quarter. Tesla is North America's leading EV producer and is, by the company's own admission, on track to produce 1.8 million EVs this year. The ongoing ramp-up of activity at the Berlin, Germany, and Austin, Texas, gigafactories, which came online last year, should allow Tesla to outpace most of its competition in the production department.
Griffin may also be enamored with Tesla's three consecutive years of generally accepted accounting principles (GAAP) profit. Whereas the vast majority of EV makers are losing money, Tesla has demonstrated that its operating model can generate a profit without the help of selling renewable energy credits to other automakers.
But the world's top EV producer isn't without its red flags, either. A rash of recent price cuts, ongoing losses from its ancillary operating segments, and Elon Musk's laundry list of unfulfilled promises, are all catalysts capable of sending Tesla's stock much lower.
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Intuitive Surgical
Robotic-assisted surgical system developer Intuitive Surgical (ISRG 0.59%) is a second stock Ken Griffin piled into. Citadel Advisors picked up close to 1.09 million shares in the December-ended quarter, which increased its existing stake by 181%.
The most obvious reason to buy shares of Intuitive Surgical is its dominance of the robotic-assisted surgical space. The company has placed 7,544 of its da Vinci systems in hospitals and surgical centers in a little over 20 years. That might not sound like a lot, but the high cost of these systems, coupled with the time-consuming training surgeons are given, makes it highly unlikely that hospitals and surgical centers using this system will switch to a competitor.
Griffin and his team might also appreciate Intuitive Surgical's razor-and-blades-modeled business. It effectively "hooks" hospitals and surgical centers with its da Vinci system. Because these systems are intricate to build, the margins associated with selling them are mediocre, at best. The "blades" come in the form of selling instruments with each procedure and servicing its systems. These are high-margin revenue channels that can allow Intuitive's bottom line growth to outpace its sales growth.
Although the pandemic has delayed some optional procedures, which has slowed Intuitive Surgical's growth, the company's long-term foundation and innovation remain rock-solid.
Meta Platforms
Ken Griffin was also a big buyer of social media stock Meta Platforms (META 0.43%), the company formerly known as Facebook. Meta is Citadel's largest stock holding (not counting options positions), with Griffin and his team adding more than 5.61 million shares in the December-ended quarter.
The impetus to buy was probably similar to Tesla. Meta's stock took a drubbing during the fourth quarter, yet the company remained strongly profitable. At the end of the day, Meta owns four of the most-popular social media sites (Facebook, WhatsApp, Instagram, and Facebook Messenger), has more than 3.7 billion monthly active users, and it usually possesses phenomenal ad-pricing power. As the U.S. economy rebounds, this ad-driven segment should only strengthen.
Meta CEO Mark Zuckerberg is also (finally) listening to the voiced concerns of shareholders regarding aggressive metaverse spending. The midpoint of Meta's 2023 spending guidance was about $5 billion lower than previous forecasts. Further, Meta's board approved up to $40 billion in share repurchases. Even if the U.S. economic environment remains challenging, we should see tangible bottom-line improvements for Meta this year.
With shares of Meta Platforms more than doubling from their fourth-quarter lows, the real question will be whether Citadel Advisors unloaded a portion of its stake for a profit during the first quarter. We'll have that answer by mid-May, which is when 13Fs for the first quarter are due.
PayPal Holdings
The top-performing hedge fund was also buying fintech stock PayPal Holdings (PYPL 2.90%) hand over fist. Ken Griffin's fund more than quintupled its existing stake (as of Sept. 30, 2022) by adding over 5.43 million shares.
One of the more interesting things about PayPal is that, while growth has slowed, it still managed to increase the total payment volume on its digital platforms (PayPal and Venmo) by a double-digit percentage in 2022, when you exclude foreign currency movements. It suggests we're still in the very early innings of digital payment growth and adoption.
As I've previously pointed out, engagement among its active accounts is on the rise, too. In the two years since 2020 came to a close, the average active account completed 26% more transactions over the trailing-12-month period. PayPal is primarily a fee-based business that's driven by increased usage. If active accounts continue to utilize PayPal and Venmo in growing numbers, profits should steadily rise over the long run.
The biggest question mark for PayPal at the moment is how quickly the nation's central bank can tame inflation. The longer the inflation rate stays above historic norms, the more likely it is consumers will pare back their purchasing activity.
